I have not been well the last several days. That usually keeps me relatively quiet, and I am sure that is just fine with many – certainly including my dear wife. But I am feeling better now, so it’s time to “let ‘er rip”!
I was born and raised in the country. Common sense was the general rule for most occasions. The acid test for anything; an idea, practice, philosophy, or scheme, was measured against the common sense rule: “if it defies common sense, it is probably not a good thing to do – period.” Now I will admit that is not the most celebrated academic premise, however it is one that has stood the test of time.
Next week about now, we will have had our first meeting report from the Fed under the Chairwomanship of Janet Yellen. This is a historic event, in that a woman has never chaired this august body before. At the risk of being labeled a sexist, I am not happy about the prospects this brings to the table. Mrs. Yellen is primarily an academic and to date has indicated that she believes that monetary policy can and should be used to control economic activities. Unfortunately, this does not measure up well when held up to the test of common sense.
Now pardon me if I am a bit dense here – after all I am not a world renowned economist – nor have I ever coined a term like Quantities Easing. I am just a dumbass country boy that still thinks it is printing money out of thin air – no matter how fancy the name for it may be. And printing money out of thin air does not hold up well when subjected to the scrutiny of common sense.
Okay, here’s my take, from the common sense side: Money must represent some real value. In other words the money in circulation represents the value of an economy (I would prefer to be saying that money represents a specific value in gold but the government buried that idea back in 1971). So I have to ask myself; what happens when those responsible for the money in an economy print more with no real improvement in the economy?
The official answer seems to be: “don’t worry, this new money will create more money and everyone will be richer for it.” But again I ask myself, somewhat like the old Wendy’s commercial, “Where’s the beef?” Having more of something only increases wealth if it is worth more when I exchange it for things I need. If all those extra dollars are simply required to get the same things, I am not wealthier – I simply have more dollars. And that’s what is worrying me.
The FED has created about 4 trillion more dollars. By a measure you choose to use that is a lot. It is a huge increase in the money supply in just a few years. I do not know about you, but I have not had a huge increase in my supply of money in the same period.
So where has the money gone and who has benefited? As I understand it, the FED has “invested” in Debt instruments – mostly Federal Bonds. The money to purchase these “assets” was printed (actually just created electronically mostly).
Where has all this money gone? Almost entirely into the banking system where it is held in reserve. Now that seems like a good idea if you own a bank. Since I do not own a bank, that might account for the fact that my money supply has not increased.
Okay, what is the reality here? The Fed has “printed” about 4 trillion dollars and made it available to the banking system. They have kept interest rates at very low levels. But on the other hand they have allowed the government to borrow money at low rates. The fact that the “Zero Interest Rate Policy (ZIRP)” is destroying the savings of a generation seems a small price to pay for the government’s being able to borrow cheaply – right?
And those assets on the Fed’s balance sheet. All those US government bonds; who is going to buy them and at what price? China – they already have all they want (and more). Japan – they are buying their own bonds in obscene amounts, why would they want ours? The American public – yeah, we are going to put all that wealth accumulated by ZIRP in future bonds purchases!
I could go on here, but if you don’t get the point by now you probably wouldn’t get it with more, so I will just close with a final rant: Common sense can be ignored, but there is a price to pay – eventually – always. It applies to you and I – and it applied to governments. The longer an idiotic idea is followed, the greater the ultimate price to be paid.
And finally, The Fed – they are following an idiotic idea – and eventually there will be a very high price to be paid – but not by the Fed heads – it will have to be paid by you and I. And that really pisses me off. If it doesn’t bother you – well, I wonder?
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